For some reason, California applies a higher discount for pensions, that carries a legal obligation, than their bonds, which is not as protected. I don't setting a rate of return higher than it should be is anything other than cooking your books. This has allowed California to increase the amount paid to employees for smaller contributions. Unfortunately the tax-payers will have to cover the difference.
I can bet money that the reason is in the CA constitution. CA has the peculiar practice of requiring funding in the form of constitutional amendments. I would bet that somewhere in the past, a proposition was put to the vote and approved that requires the CA state government to use a rate out of sync with everyone else.
Now having said that, I go to check my hypothesis. According to the CA state constitution, California is obligated by amendment to not have the option of defaulting on existing pension liabilities. So they have to pay up no matter what.
The source of the discrepancy lies in the particular discount rate adopted, which determines future pension obligations in today’s value. Many argue that a more conservative rate of return should have been assumed. Because the retirees have been promised a defined-benefit plan, they are contractually guaranteed a fixed pension payment regardless of the funds’ investment performances, thus creating the potential for an insurmountable funding shortfall if investments decline sharply, as they did during the market meltdown.
Further searching shows that the high rate of return of 7-8% is used not only by CA, but by EVERY state in the USA for their pensions, basically in order to prevent from having to raise pension contribution rates unilaterally and thus lose elections.
So I still couldn't call this cooking the books. Using an overly optimistic and risky return rate for the pension plan may be irresponsible, but it's not criminal or wrong accounting. There's no prevailing law or even set standard to use the risk-free number in place of a riskier scheme. It's no different from having your broker change your portfolio from conservative to balls-to-the-wall risky.
Neither my broker or the taxpayers are required to make up any difference between the expected high risk rate of return and what I actually earn, this is the big difference.
Using the rates provided, the states need to set aside about half as much to cover a pension as a private company would. It should throw up a red flag that it would be illegal for a private company to use rates such as these. This has allowed higher benefits for lower contributions. This, along with the obligation to cover pensions represents a transfer of about $3 trillion from taxpayers to public employees. The bail out of Wall Street was tiny compared to this, and almost all of that money was paid back.
Neither my broker or the taxpayers are required to make up any difference between the expected high risk rate of return and what I actually earn, this is the big difference.
I would say so. Unfortunately, being in the state constitution by voter-approved amendment (like Prop 8 and others), there's not much to be done about it. It's The Law.
It should throw up a red flag that it would be illegal for a private company to use rates such as these.
It wouldn't be illegal, just risky. As long as they advertise the risk properly there's no impediment to using such rates.
This, along with the obligation to cover pensions represents a transfer of about $3 trillion from taxpayers to public employees.
The highest estimate I've seen for the state of CA is $500 billion, which falls far short of that. Exactly where are you getting $3 trillion from?
I'm not blaming Prop 8, in most states, public employee pensions get priority by law. If this were just California, then you might blame Prop 8.
I also don't agree that there isn't much that can be done, this law was made, largely at behest of the public employee unions whose members benefited from it, it can be unmade.
Three trillion is the total for all states, not just California.
Also, I never said this was illegal, but then most of what Wall Street did was legal as well. This is the kind of stuff that will make the next crisis, we should use this crisis to make some changes.
I can bet money that the reason is in the CA constitution. CA has the peculiar practice of requiring funding in the form of constitutional amendments. I would bet that somewhere in the past, a proposition was put to the vote and approved that requires the CA state government to use a rate out of sync with everyone else.
Now having said that, I go to check my hypothesis. According to the CA state constitution, California is obligated by amendment to not have the option of defaulting on existing pension liabilities. So they have to pay up no matter what.
And in this document, it appears the discrepancies are explained:
The source of the discrepancy lies in the particular discount rate adopted, which determines future pension obligations in today’s value. Many argue that a more conservative rate of return should have been assumed. Because the retirees have been promised a defined-benefit plan, they are contractually guaranteed a fixed pension payment
regardless of the funds’ investment performances, thus creating the potential for an insurmountable funding shortfall if investments decline sharply, as they did during the market meltdown.
Further searching shows that the high rate of return of 7-8% is used not only by CA, but by EVERY state in the USA for their pensions, basically in order to prevent from having to raise pension contribution rates unilaterally and thus lose elections.
So I still couldn't call this cooking the books. Using an overly optimistic and risky return rate for the pension plan may be irresponsible, but it's not criminal or wrong accounting. There's no prevailing law or even set standard to use the risk-free number in place of a riskier scheme. It's no different from having your broker change your portfolio from conservative to balls-to-the-wall risky.
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Using the rates provided, the states need to set aside about half as much to cover a pension as a private company would. It should throw up a red flag that it would be illegal for a private company to use rates such as these. This has allowed higher benefits for lower contributions. This, along with the obligation to cover pensions represents a transfer of about $3 trillion from taxpayers to public employees. The bail out of Wall Street was tiny compared to this, and almost all of that money was paid back.
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I would say so. Unfortunately, being in the state constitution by voter-approved amendment (like Prop 8 and others), there's not much to be done about it. It's The Law.
It should throw up a red flag that it would be illegal for a private company to use rates such as these.
It wouldn't be illegal, just risky. As long as they advertise the risk properly there's no impediment to using such rates.
This, along with the obligation to cover pensions represents a transfer of about $3 trillion from taxpayers to public employees.
The highest estimate I've seen for the state of CA is $500 billion, which falls far short of that. Exactly where are you getting $3 trillion from?
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I also don't agree that there isn't much that can be done, this law was made, largely at behest of the public employee unions whose members benefited from it, it can be unmade.
Three trillion is the total for all states, not just California.
Also, I never said this was illegal, but then most of what Wall Street did was legal as well. This is the kind of stuff that will make the next crisis, we should use this crisis to make some changes.
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